CHAU SAI HONG AND OTHERS v. CHENG STEPHEN SOHIM AND OTHERS

HCMP 1556/2016

[2020] HKCFI 3064

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1556 OF 2016

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(By Original Action)

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(By Counterclaim)

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D E C I S I O N

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Background

1.  In this decision, all references to the Plaintiffs and Defendants are to those in the original action.

2.  The pleaded cases of the Plaintiffs and D2-D4 show that the shares (“the Shares”) in D3 (“the Company”) had purportedly been sold by Choi Ka Fu (D5 by counterclaim) twice – once to D2, and another time to D1. D1’s shares eventually fell into the hands of the Plaintiffs.

3.  The Plaintiffs’ case is that at the time of their purchase, the Companies Register did not reveal the existence of D2 as the shareholder, or D2 and D4 to be the directors.  The Plaintiffs later discovered that 6 Documents filed in the Companies Register (“Incorrect Documents”) contained incorrect information as to the shareholder, director, company secretary and registered office.  It transpired that one Leung Chun Mo (director of D5, a company providing company secretarial service) had forged the signature of P1 on some of the Incorrect Documents. 

4.  The Plaintiffs sought to have the Incorrect Documents removed from the Companies Register (“Removal Order”). 

5.  The case of D2-D4 is that D2 acquired the Shares from Choi Ka Fu prior in time.  D2-D4 dispute the validity of the purported acquisition by the Plaintiffs and the resultant appointment of a director and company secretary from the Plaintiffs’ camp.

6.  Before me, there are 3 summonses:

(1)  A consent summons signed by the Plaintiffs on the one part and D2-D4 on the other, filed on 20 February 2019 (“Consent Summons”).  It came before me on 2 January 2020.  I adjourned the matter on the grounds that, the Removal Order would have affected D1 and D5 who were not then served.  Further, the Companies Registrar had not been given notice of the application for the Removal Order.  During the adjournment, the Plaintiffs took out the next 2 summonses.

(2)  A summons dated 3 December 2019 for default judgment against D1 and D5 (“Default Judgment Summons”); and

(3)  A summons dated 13 December 2019 for summary judgment against D2-D4 (“Summary Judgment Summons”) for a declaration that the Incorrect Documents were null and void and to have them removed from the Companies Register pursuant to section 42 of the Companies Ordinance (“Cap 622”).

7.  At this hearing, the Plaintiffs sought judgment on the 2^nd and 3^rd summonses.  D2-D4 opposed the Summary Judgment Summons and asked for an order in terms of the Consent Summons.

8.  Having filed a Statement at the direction of the Court (“Registrar’s Statement”), the Companies Registrar has remained neutral.

The pleaded cases

9.  The Company was at all material times the holder of a China-Hong Kong vehicle licence (“Vehicle Licence”).

10.  According to the Re-amended Statement of Claim (“RASOC”), the Plaintiffs acquired the Shares from D1’s lender in the following circumstances:

(1)  All the Shares were transferred by Choi Ka Fu to D1 on 18 August 2014.  This was reflected in the Companies Register at that time.

(2)  Also in about August 2014, upon introduction by Intell Finance and Mortgage Ltd, D1 obtained a loan from Ms Chen Mei Hua (“Lender”) on the security of the Shares.

(3)  P2 (allegedly using funds from P3) acquired the Shares from the Lender for a consideration of HK$1,280,000 when D1 defaulted in repayment of the loan.

(4)  Upon that acquisition, P2 became the sole shareholder and director of the Company on 22 January 2015, holding the Shares on behalf of P3.

11.  The Plaintiffs discovered the Incorrect Documents filed at the Companies Register on various dates between 12 November 2015 and 19 January 2016.

(1)  They wrongly stated, amongst others, that D2 was the sole shareholder and that D2 and D4 were the directors of the Company.

(2)  P1’s signature on the 1^st, 2^nd and 4^th Documents were forged.

12.  The presenter of the Incorrect Documents was D5.  Its director, Leung Chun Mo, confessed to have forged the signature of P1, with the intention to help his client (D2) to renew the Vehicle Licence.

13.  Leung Chun Mo was convicted of 3 counts of using a false instrument in respect of the 1^st, 2^nd and 4^th Documents.

14.  P1 and P2 first commenced proceedings only against D1 and D2 on 20 June 2016. 

15.  At the direction of G Lam J on 21 February 2017, these proceedings were turned into a writ action.  On 28 June 2017, Master Lai gave leave to add P3 as a plaintiff and D3-5 as defendants.  Pleadings were filed by the Plaintiffs and D2-D4.

16.  It is the Plaintiffs’ case that D2 was never the shareholder; D2 and D4 were never appointed as directors.  The continuing presence of the Incorrect Documents in the Companies Register will cause material damage to the Company, in that the Mainland authorities and Hong Kong Transport Department would not renew the permits for the Vehicle in the light of the mess created by the Incorrect Documents.

17.  D2-D4 deny the Plaintiffs’ case.  They claimed that D2 had purchased the Shares from Choi Ka Fu back in 2011.  D2 has since 7 June 2011 been a director of the Company.

18.  In about August/September 2015, D4 tried to renew the closed road permit for the Vehicle and the annual return of the Company was required.   One Peter Leung (unclear on the defence whether or not this was Leung Chun Mo) who used to handle company secretarial matters for the Company informed D4 that the Company’s records at the Companies Register was in a mess.  Amongst others, D2’s name did not appear on the Companies Register as a shareholder and director of the Company.    

19.  At the suggestion of Peter Leung, D4 became a director.  D2 and D4 signed the 5^th and 6^th Documents. 

20.  D2-D4 dispute the validity of the Plaintiffs’ acquisition of the Shares. They also dispute the correctness of information in various documents filed at the Companies Register, in particular the 1^st, 2^nd, 4^th and 6^th Documents, which wrongly stated the shareholder, director and company secretary from the Plaintiffs’ camp.

21.  D2-D4 also allege that (a) the 1^st Document incorrectly stated that D2 was appointed a director of the Company on 2 March 2015 when D2 has all along been the director; and (b) the signature of D2 on the 1^st Document was forged.

22.  D2-D4 counterclaim against the Plaintiffs, D1 and Choi Ka Fu for:

(1)  A declaration that D2 was at all material times the sole owner of the Shares;

(2)  A declaration that D2 and D4 were at all material times the directors of the Company; and

(3)  A removal order covering some other documents of the Company.

23.  D2-D4 further counterclaim against Choi Ka Fu for:

(1)  Indemnity against any money judgment, due to his fraud and breach of trust; and

(2)  The value of the Shares or equitable compensation.

24.  In reply, the Plaintiffs say that they were bona fide purchasers for value without notice when P1 and P2 (acting on behalf of P3) entered into an Oral Contract with D1 for the sale and purchase of the Shares in September 2014.  That was because the relevant documents filed at the Companies Register at that time did not disclose the transfer of shares from Choi Ka Fu to D2 as shareholder; or that D2 and D4 were appointed directors.

25.  There is thus disclosed on the pleadings, amongst others, an issue of whether D2 or P3 is the real beneficial owner of the Shares.

Legal principles for removal of documents filed at the Companies Register

26.  Section 42(1) of Cap 622 provides that the Court may, on application by any person, by order direct the Companies Registrar to rectify any information on the Companies Register or to remove any information from it if the Court is satisfied that—

(a)  the information derives from anything that is invalid or ineffective; or has been done without the company’s authority; or

(b)  the information is factually inaccurate; or derives from anything that is factually inaccurate or forged.

The Consent Summons

27.  Under the Consent Summons, D2-D4 are to pay a sum of $300,000 to the Plaintiffs by 5 instalments in full and final settlement of the original action and counterclaim amongst them.  The Incorrect Documents would be removed from the Companies Register forthwith.  Upon receipt of full payment,

(1)  P1 and P2 shall resign as company secretary and director respectively;

(2)  P2 and P3 do provide a signed form of declaration (to be agreed) to D2 to D4, confirming that neither P2 and P3 nor the Lender have any legal or beneficial interest in the Company;

(3)  The Plaintiffs shall discontinue the action against D2 to D4; and

(4)  Upon the Plaintiffs’ compliance with the aforesaid, D2 and D4 shall discontinue the counterclaim against the Plaintiffs.

28.  The Plaintiffs did not pursue the Consent Summons at this hearing but D2-D4 sought an order in terms.  D2-D4 maintain that, like the Plaintiffs, they were also victims of fraud; and the counterclaim would remain to the extent of D2 and D4 suing D1 and Choi Ka Fu.  The parties did not appear to be in agreement.

Summary Judgment Summons

29.  The Summary Judgment Summons was the Plaintiffs’ focus at this hearing.  However, for the following reasons, I decline to grant judgment on it.

30.  Firstly, an application for summary judgment is not suitable for cases involving allegations of fraud and dishonesty: Order 14, rule 1(2)(b) of the Rules of the High Court.  And yet an indispensable part of the Plaintiffs’ case is the dishonesty and forgery committed by Leung Chun Mo. 

31.  Secondly, the Summary Judgment Summons was an abrupt turn from the Consent Summons, which has neither been approved nor withdrawn.  The Plaintiffs purported to abandon the other reliefs in the RASOC and Consent Summons. 

32.  The explanation came only from the Plaintiffs’ counsel from the bar table – once the Incorrect Documents were removed from the Companies Register, the Plaintiffs could then sell the shares to D2-D4. 

33.  With respect, a consent summons is in the nature of an “agreement” between the relevant parties.  It cannot be ignored without both parties’ agreement or for valid reasons.  The Plaintiffs’ resilement and D2-D4’s pursuit of it have to be sorted out before the Court would give any judgment.

34.  Thirdly, the Plaintiffs have pleaded inconsistent cases in its RASOC and its amended reply.  The former refers to the Plaintiffs’ acquisition of the Shares from the Lender.  The latter refers to acquisition from D1.  This material inconsistency cast doubt on whether the Plaintiffs had acquired the Shares, when and from whom.

35.  Fourthly, it cannot be said that D2-D4’s case is not triable.  This is because D2 was involved with the Company as a director as early as in 2011, well before the alleged acquisition of the Shares by the Plaintiffs.  See Exhibit RC-26 to the Registrar’s Statement.

36.  Fifthly, a Removal Order cannot be given by consent without the Court being satisfied that there is proper factual foundation to do so.  Without deciding who the real shareholder was and hence who had the authority to appoint directors and company secretary, the Court cannot be satisfied that the requirements in s.42 of Cap 622 were met.

Default judgment against Cheng and Good Profit

37.  Under Order 19, rule 7 of the Rules of the High Court, since D1 and D5 have not served a defence, the Plaintiff may apply to the Court for judgment.  On the hearing of the application, the Court shall give such judgment as the Plaintiffs appear entitled to on his statement of claim. 

38.  The following principles regarding default judgment are well-established:

(a)  The statement of claim must show a case for the order the plaintiff seeks to obtain. The Court’s task (in exercising its discretion) is to see whether the plaintiff appears to be entitled to judgment on his statement of claim.

(b)  The Court cannot receive any evidence but must give judgment according to the pleadings alone.

(c)   A plaintiff may apply for default judgment against a defendant and proceed with the action against other defendants if his claim against the defendant in default is severable from his claim against the other defendants.

Zhang Xiuhong v Liu Wenchen & ors; HCA 2118/2012 (20 July 2017), Au-Yeung J.

39.  Further, there is a general proposition that a declaration will not be granted when giving judgment without trial (e.g. judgment in default of defence). However, it is a rule of practice and not of law, and will give way to the paramount duty of the Court to do the fullest justice to the plaintiff to which he is entitled: Law Yuk Fong v Man Chung Wai & anor, HCA 2195/2015 (unreported, 16 January 2017) at §17, DHCJ Marlene Ng (as she then was).

40.  I have alluded to the inconsistent pleaded case of the Plaintiffs (paragraph 34 above) and have doubts as to the Plaintiffs’ entitlement to judgment.

41.  But even if I am satisfied as to the Plaintiffs’ case on the RASOC, the Plaintiffs are still not entitled to the reliefs sought without a trial. As between the Plaintiffs and D1, it may be said that the Plaintiffs have a better right to the Shares; and D5 did wrong the Plaintiffs.  However, to get the declaration and the Removal Order sought, D2 and D4’s case must be rejected.  But I have already held that D2-D4’s case is triable.

42.  The Plaintiffs’ case against D1 and D5 on the one part and that against D2-D4 on the other, are simply non-severable.  I decline to enter default judgment.

Conclusion

43.  Having regard to the analyses above, without true consent from both the parties, I decline to approve the Consent Summons.  Without the Plaintiffs’ explanation as to why they resiled from their position under the Consent Summons, the doubts in the Plaintiffs’ case and the existence of triable issues, I dismiss the Summary Judgment Summons.  In view of the inconsistency in the Plaintiffs’ own case and the fact that the claim against D1 and D5 is non-severable from that against other Defendants, I dismiss the Default Judgment Summons.

44.  On a nisi basis,

(1)  Costs of this hearing on the Consent Summons shall be to D2-D4 (this is because the Consent Summons has otherwise provided for no order as to costs);

(2)  Costs of the Summary Judgment Summons shall to be D2-D4; and

(3)  There be no order as to costs on the Default Judgment Summons.

45.  There shall be summary assessment of costs of D2-D4 on the papers on 18 December 2020.  D2-D4 in the original action shall file and serve their statement of costs by 15 December 2020.  The plaintiffs shall file and serve their grounds in opposition by 17 December 2020.